Monthly Archives: September 2011

The Solyndra Panic

Source: Solyndra / BusinessWire

Bad news from Solyndra has set off a bit of a panic around everything from the future of solar in the U.S., the role of government in supporting innovative technologies, and prospects for clean energy jobs.  Caution is advised and perspective is needed lest we walk away from a pivotal new global market.  Let’s start with the big picture on solar.  I believe it is critical that we focus on the full value chain for energy and environmental solutions to better understand the economic growth inherent in the clean energy market.  In the case of solar, an analysis released last month by GTM Research examined the entire value chain – from raw material inputs and capital equipment needs to panel assembly and installation and maintenance.  The results show that the U.S. has a trade SURPLUS with rest of the world AND with China in the solar sector defined across the entire value.

Let me highlight some of the key findings: 

  • The U.S. was a significant net exporter of solar energy products with total net exports of $1.9 billion in 2010.
  • The U.S. solar industry had a positive trade balance with China with net exports of $247 million – $540 million.
  • The largest solar energy export product is polysilicon, the feedstock for crystalline silicon photovoltaics, of which the U.S. exported $2.5 billion in 2010.
  • 2010 U.S. solar energy installations created a combined $6.0 billion in direct value, of which $4.4 billion (75%) accrued to the U.S.

This is a good news story, and not surprisingly to me as over the past several years we’ve heard positive stories from companies like Komax Solar, an equipment supplier.  Six years ago, Komax took a risk and transitioned itself from medical technology and electronic machines to supplying the equipment needed in the assembly plants for solar panels.  Komax is exporting, has tripled its workforce, and has leveraged its expertise in precision machining to move into new solar markets.

What role the government played in the larger solar story is hard to pinpoint, but many solar companies had real and critical capital needs during the recession that the American Recovery & Reinvestment Act of 2009 (ARRA) filled.  Project Sunburst, a Maryland Energy Administration (MEA) initiative that benefitted greatly from the ARRA funding, created demand for solar panels installation on public buildings and triggered $36 million private investment.  In addition, while the primary goal was making it easier for public entities to go solar, “It had an additional goal or larger goal to encourage the growth of solar energy generation in the state as a resource,” MEA spokesperson Ian Hines said. The investment helped give the industry the extra push that put it over the tipping point as a maturing industry in Maryland.

This leads me to believe that ARRA has indeed been an important ingredient.  The government has also taken a portfolio approach that includes companies like Nanosolar, which received almost $44 million as a 48C tax credit (one of the ARRA programs) and is currently hiring.  This is a company whose prospects excite me.   

At the end of the day, experience shows that the private sector is better at picking winners and losers, and the government is much better at “setting the table” – for example, investing in core, enabling innovations such as developing a well-designed, open-platform smart grid that enables new entrants such as solar power to compete with old electricity providers (the value chain for smart grid solutions, by the way, is extremely promising for US firms and job creation).  And, equally as important, the government must put into place energy policies that provide a level playing field and ensure that the full costs to society of energy products and services are accounted for, policies that ultimately put a price on carbon.

Posted in Grid Modernization, Renewable Energy, Washington, DC / Tagged , , | Read 1 Response

Playing Politics With Power

Source: The Lookout

Déjà Vu All Over Again
Listen carefully these days and you might think it was last year, 2009, or even 2006.  Just a year ago, Governor Perry lambasted the EPA’s decision that Texas’ air permitting program was illegal and amounted to special treatment for a single state when all other states are in compliance with the law.  In a statement at the time Perry claimed “The EPA’s irresponsible and heavy-handed action …. threatens thousands of Texas jobs, families, businesses and communities throughout our state.” Perry went on to claim that “it will also likely curtail energy supplies and increase gasoline prices nationwide.”  Last month the EPA announced that every former Texas permit holder is now successfully working with the agency on their new permits.  No more claims of job losses or gasoline shortages, just companies working with regulators to abide by the law and protect the health of Texans.

In 2006, TXU (now Luminant), the largest power plant owner in Texas, announced that they needed to build 11 coal plants to make sure there weren’t any rolling blackouts in the next few years.  A serious PR campaign ensued with TXU and Governor Perry trying to fast track the coal plants, but as it turned out, they weren’t needed, and that’s part of the reason TXU is now known as the Energy Future Holdings (EFH), the parent company of Luminant.  In fact, the coal plants that Luminant did build, Oak Grove and Sandow, were a big part of the reason Texas experienced the blackouts in February – supposedly reliable, 24-hour coal plants tripped offline when it got too cold.

Repetitive Stress Injury
Raising the threat of job losses, blackouts or other specters has become so common for Perry and industry that it probably amounts to muscle memory at this point. It reached a new level this week, however, when Luminant decided that it would lay people off in order to make a statement.  While Luminant may not like the Cross-State Air Pollution Rule (CSAPR), it’s essentially a “Good Neighbor” rule and none of the clean air protections in the rule require any power plants to shut down.  Companies like Luminant make the decision — either invest in common retrofits like scrubbers to clean up pollution or close down old and poorly controlled plants and replace them with cleaner more efficient generation.

Numerous companies, such as Houston based Dynegy, Exelon, PPL Generation and NRG Energy, have publicly announced that they are well-prepared to meet the updated clean air protections.  As Dynegy’s CEO Robert Flexon points out: “Any efforts to delay or derail CSAPR would undermine the reasonable, investment-based expectations of Dynegy.  In our case, CSAPR allows competitive markets to confer deserved economic returns on our investments in clean energy technology.”  In his Houston Chronicle business column today, Loren Steffy muses: “Funny how much difference good financing and a little planning can make. After all, power generators knew that, sooner or later, stricter air standards were coming.”

Scare Tactics
This also means that claims of rolling blackouts are vastly overstated.  While a study released by Electric Reliability Council of Texas (ERCOT) has received a lot of coverage, the headlines have focused far more on flash than substance.  In fact, ERCOT admits that Texas has had 6 years to prepare for this rule, beginning with the passage of the Clean Air Interstate Rule in 2006, which included Texas.   What’s even more troubling is that ERCOT seems to assume that neither the grid operator, nor any of the power companies, intends to learn from the lessons of this past year in terms of better preparations for extreme weather.   ERCOT assumes that this time next year our power plants will again be unprepared for long periods of hot weather.  In Texas.

In fact, a close reading of the ERCOT study actually rebuts the most popular arguments of state officials and industry that Texas had no warning that this rule was coming:

“The rule is a replacement for the Clean Air Interstate Rule (CAIR), which was implemented in 2005. The CAIR was remanded to the EPA by the United States Court of Appeals for the District of Columbia Circuit in 2008. In the CAIR program, Texas was regulated for particulate matter emissions (annual NOX and SO2 emissions).”

In their presentation to the Texas Public Utilities Commission (PUC), ERCOT directly contradicted the claims of industry and officials protesting this rule.  At the center of this argument is the idea that EPA’s modeling, which shows increased prices for low sulfur coal, is incorrect.  ERCOT’s conclusions seem to support the EPA’s modeling, though, stating that the rule “will have impacts on national fuel markets, increasing demand for natural gas and low sulfur sub-bituminous coal.”

A Texas Tradition: Politicizing ERCOT
It would be much easier to take ERCOT’s study seriously if the organization hadn’t become so politicized over the last 5 years.  In 2006 TXU (now Luminant) seized on a flawed ERCOT analysis to justify the need to build 11 new coal plants to boost reserve margins in 2009/2010.  The plan stalled and 2010 reserve margins proved much higher than ERCOT’s original projections.  Since then, using ERCOT studies to meet the needs of the moment has become a science, whether it serves the needs of someone running for President on a platform of clean air bashing or one of the companies running their committees.

In the latest example, the desired outcome of ERCOT’s latest study was made clear by a number of public statements from Texas PUC Chairwoman Nelson prior to the study’s release, including her August 4th letter to the EPA and her statement in late August:  “I have no doubt in my mind that this rule will result in reliability issues and rolling outages in Texas.”  It’s a little like the boy who cried wolf, but this time businesses are laying off workers because their management team failed to plan accordingly to abide by the law.   It’s an especially hard claim to swallow given that ERCOT’s own planning documents show over 12,000 MW of resources are expected to come online within the next few years.

Gambling Away Jobs
The truth is that Luminant, just like Dynegy, Exelon, NRG, the Lower Colorado River Authority, Austin Energy and San Antonio’s CPS made a choice in 2005.  As other companies planned for compliance, Luminant chose to fight it, gambling with their shareholders’ money and their employees’ jobs.  Think of this: In 2005, there were 32 other power plants in the nation that emitted more sulfur dioxide (SO2) than Luminant’s Martin Lake coal plant.  By 2010 there were only three.  At the time, Luminant probably thought that by not investing in retrofits like scrubbers to clean up pollution, they could get ahead of the competition.  Ironically, what they have found out instead is that they are actually behind the competition, and now their employees may suffer for poor decisions made by management.

Posted in Climate, Grid Modernization, Texas / Read 1 Response

San Diego Outage Triggers A Green Grid Revolution (in author)!

I landed at San Diego International Airport at 4pm on Thursday.  Since I sat towards the front of the plane, I was one of the first people to walk up the corridor.  Suddenly, the lights went out.  “Perfect timing,” the woman in front of me said.

As I walked through the airport, the lights were off, the lines had grown long.  Cell phones weren’t working, and I was reminded of a zombie movie I had seen.  Waiting in the late afternoon heat, I tried to remember the exact words in my colleague’s quickly written agreement to pick me up and drive me to the event.

I hoped that it was just the airport, but as we inched our way through the traffic, it was clear that San Diego had ground to a halt.  Gas stations became crowded with people who literally ran out of gas and couldn’t get home.  As the sunlight waned, we rushed to buy provisions (water, protein bars, etc.) at an Albertsons – possible only because it had installed fuel cells or solar panels.  From the freeway we could see that University of California San Diego, which has its own microgrid, was also lit up thanks to distributed generation. 

We learned that a transmission problem in Arizona had caused a possible sequence of events that included the protective functions at the nuclear power plant turning the plant off and lead to extensive power outages throughout San Diego, southern California, and parts of Mexico.  The funny part?  I was with a colleague from San Diego Gas and Electric, traveling to speak about our collaborative smart grid planning effort.  We couldn’t help but think about how the smart grid could have helped here. 

Storage and advanced grid sensing and control technologies could have isolated the problem at its source and kept it from growing.  The smart grid’s ability to incorporate larger amounts of renewable energy could have kept electricity flowing.  Microgrids – with their own local generation and smart technologies – could have switched to an off-grid mode and remained powered through the outage.  Buildings with demand response capabilities and appropriately designed roof top solar or other forms of distributed generation, could have reduced their consumption and used smart technologies to share their power with businesses running critical equipment or with people who need air conditioning or medical equipment to maintain their health.

Source: AP Photo/Gregory Bull

Smart grids can play an even bigger role after an outage is over: Electricity production is a huge source of air and water pollution– emissions from U.S. electricity production make up 30% of domestic climate change pollution and over 6% of global emissions.  A thoughtfully-designed smart grid could reduce harmful emissions by up to 30% and fight against the tragedy of more than 34,000 deaths a year from power plant pollution – more lives than are lost on U.S. highways.

A greener grid will also put us at the forefront of the world’s competitive clean energy economy.  A recently released Duke University report commissioned by EDF identified smart grid companies already flourishing in 37 states at 315 locations—including headquarters, manufacturing plants and hardware/software development facilities.

All of this adds up: the green grid revolution will create as many as 180,000 domestic jobs per year while saving lives.  Now that’s worth standing up for.

Posted in California, Grid Modernization / Read 1 Response

Using Financial Innovation To Break Down Barriers to Energy Efficiency Upgrades – Part 2: Residential Buildings

Energy Efficiency Financing Blog Series

By: Brad Copithorne, EDF’s Energy & Financial Policy Specialist

In Part 1 of this blog series, we examined how several innovative companies have developed a structure to finance energy efficiency projects in commercial buildings.  This structure, an Energy Services Agreement (ESA), provides building owners access to capital, solves the split incentive issue and eliminates exposure to performance risk on the project.  In Part 2, we examine another innovative financing solution that will provide capital to residential projects.

McKinsey recently estimated that there is over $225 billion of available cost effective energy efficiency investment opportunities available in the residential sector.  If these investments are made, energy consumption in the residential sector will decline by 28% by the end of this decade.  Unfortunately, most homeowners do not have access to low-cost sources of capital to pay for the upfront costs of the retrofits.

On-Bill Repayment

On-bill repayment (OBR) programs allow customers to repay third-party loans for energy efficiency and renewable energy investments through their utility bills.  Utility bills generally have very low default rates because nobody wants their power turned off.   Loans tied to the utility bills should also have low default rates which will allow lowered costs for borrowers and increased availability of credit.

During the past decade, various utilities have successfully piloted more than a dozen on-bill finance programs.  These programs have used utility, ratepayer, public or mission-driven capital which has greatly limited scalability.  An OBR program, on the other hand, uses entirely third party capital from profit motivated investors such as banks.  Since this is a much larger pool of capital, the supply of funds will increase to meet demand.

Based on extensive consultation with key stakeholders, including banks, the three California investor-owned utilities, project developers and others, EDF believes that an OBR program can be successfully launched statewide in California using entirely private capital, and provide building owners with low-cost funding for energy efficiency and renewable projects.   EDF is currently in discussions with California utilities and regulators on creating an OBR program for the state.

EDF estimates that a statewide OBR program that would generate $2.7 billion of annual investment in energy efficiency and renewable projects.  Over 20,000 installation jobs would be created and after 5 years, annual CO2 emissions would decline by 7 million tons.

On-Bill Repayment: Step By Step

  • Approved contractors and utilities identify projects, and then help building owners apply for a loan to pay for upgrades. 
  • The contractor provides the homeowner with an estimate of the expected monthly energy savings and up-front upgrade costs.  
  • If the loan is approved by a 3rd-party lender, the contractor will execute the project. 
  • Expert, objective inspectors (managed by either the utility or a government entity) validate the estimate of projected savings and that the upgrades are properly installed. 
  • Homeowners pay a combined monthly bill for both energy and loan repayment.  The program would require that savings exceed debt service, so the customer would see a reduction in their monthly utility bill.

Example: Homeowner

Current utility bill: $350 per month
Investments: Solar panels, duct sealing, controls and new refrigerator
Expected utility bill savings: $225 per month
Investment loan: $20,000
Loan terms: 
–          Interest rate on loan: 6.25%
–          15 years repayment schedule
–          Monthly payment: $170

Utility bill after retrofit:  $125
Utility bill + loan payment:  $295

Savings: $55 per month (savings will grow as utility energy rates increase)

Program Terms

  • Any building with a meter would be eligible including commercial, industrial, public, multifamily and single family residential buildings.
  • Eligible measures would include approved list of renewable and energy efficiency projects.
  • Contractors and lenders would be subject to pre-approval.
  • Projected first year savings would need to exceed debt service by a comfortable margin. 
  • Lender would have no ability to request a customer disconnection but partial bill payments would be allocated proportionally between lender and utility.  The utility would follow all standard disconnect procedures.

Innovations In Energy Efficiency Finance

Next week EDF and Citi are co-hosting a conference for institutional investors, real estate owners and project developers on energy efficiency finance.  Both ESAs and on-bill repayment will be discussed extensively.  Our next blog post will report on the outcomes of the conference.

Posted in Energy Efficiency / Tagged , | Read 2 Responses

Jobs For Today AND Tomorrow

 The President’s response to the call for jobs now is necessarily focused on short-term triggers.  But, we must simultaneously seed the jobs for the next two to five years, or we will just keep putting ourselves back into the same hole.  These so-called “medium term jobs” must come from growth sectors in the global economy where the U.S. has skills and ideas to offer.  To me, the most promising of those sectors are health care and clean energy & resource management.

Source: Veterans News Now

It is in the latter area that the U.S. needs to, as David Brooks recently described, “set the table” with policies that create customers for the many small to large businesses that are striving to participate in this new sector.  In our survey of clean energy businesses, 73% are small businesses with less than 50 employees.  Of these, according to market research by Frost & Sullivan, one third believed that the failure to pass clean energy legislation last year had an effect on their business and 7 out of 10 thought their sales would increase if the U.S. passed new policies to reduce greenhouse gases.

When business of all sizes know that they are going to have customers – not just today from a short term stimulus or other plan, but customers derived from a long term commitment by our country to move to clean energy and less air pollution – they can  hire permanent employees.   In California, where the state has been slowly but steadily setting the table with rules for cleaner vehicles, a renewable portfolio standard, the Global Warming Solutions Act and energy efficient building codes, the clean energy sector is a growing source of jobs.  For example, according to Next 10 report from May 2011, jobs in manufacturing of clean energy and resource management activities grew 19% between 1995 and 2008 while total manufacturing employment in the state dropped 9%.

Without creating customers, “clean energy jobs” workforce training programs become a bridge to nowhere, the promise of clean energy jobs falters and businesses remain faced with lots of uncertainty and a natural reluctance to permanently hire new people.  The National Infrastructure Bank and rebuilding schools will hopefully create customers for some of these firms.  But what businesses really need to hire people is the prospect of customers over the medium-term.  We need Presidential leadership on federal clean energy policies to help deliver a steady-stream of customers and seed the jobs of tomorrow.

Posted in Energy Efficiency, Grid Modernization, Jobs, Renewable Energy, Washington, DC / Read 2 Responses

Using Financial Innovation To Break Down Barriers To Energy Efficiency Upgrades – Part 1: Commercial Buildings

Energy Efficiency Financing Blog Series

By: Brad Copithorne, EDF’s Energy & Financial Policy Specialist

Energy efficiency is the fastest, most cost-effective way to reduce greenhouse gas (GHG) emissions in the United States.  In many cases, energy efficiency (“EE”) projects can provide extremely attractive financial returns.  Using data from a 2009 McKinsey study, EDF estimates that there are at least $40 billion of investment opportunities for EE projects in commercial buildings that will provide annual returns in excess of 20%.  Despite this attractive potential, few of these EE projects are being funded in commercial buildings.

Over the past 12 months, EDF has engaged in an extensive dialogue with dozens of key industry participants to determine the barriers that are preventing development of this market.  We spoke with leading owners of real estate, lenders, institutional investors, EE project developers, academics and other nonprofits.  Based on this work, EDF has identified three primary market barriers that are preventing investment in EE projects for commercial buildings (for further details, see our recent white paper Show Me The Money: How Energy Efficiency Financing Makes Dollars And Sense):

1)     Lack of debt capacity – Most commercial buildings cannot borrow additional funds and/or have a first mortgage that includes a limitation on additional indebtedness that prevents incremental borrowing.

2)    Split incentives – Under the terms of most commercial leases, tenants pay for many operating expenses including energy costs.  Landlords, however, must absorb most capital expenses.  For an EE project this may mean that the landlord pays for the project but tenants capture the bulk of the savings.

3)    Lack of confidence in projected energy savings – Many building owners and lenders are skeptical that EE projects will achieve projected energy savings.


Energy Services Agreement – Part of the Solution

EDF has been working closely with several entrepreneurs to develop and promote a financing structure that may solve the debt capacity, split incentive and projection of savings barriers.  The structure, known as an Energy Services Agreement (“ESA”), allows an investor to agree to provide energy to a building at a price based on the building’s historical costs.  The investor pays for EE upgrades and then uses the savings to provide a return on investment.

For example, imagine a building that currently pays $100,000 per month for electricity and an investor that spends $2MM to reduce the monthly expense to $60,000.  The investor collects the $40,000 in monthly savings for 6 years in order to generate a return on invested capital.  From the building owner’s perspective, all payments are operating expense so they can be passed directly to tenants (solves split incentive) and the building incurs no additional debt.  The investor takes the risk that the project may not generate expected savings.

We have been working closely with several companies in this space, including Transcend Equity, Metrus Energy, Green Campus Partners, Serious Energy, Abundant Power, Sustainable Development Capital and GEAR Energy.  Each of them has a slightly different structure and/or target market, but EDF is optimistic that these companies, among others, will be able to change how energy efficiency retrofits are financed for commercial buildings.

Innovations in Energy Efficiency Finance Conference

Citi and EDF are co-hosting a daylong conference on energy efficiency finance on September 20, 2011 to examine innovative financing solutions for energy efficiency projects in the commercial, residential and public sectors.  Stay tuned.

Posted in Energy Efficiency / Comments are closed